On 28 September 2021, the Supreme Court issued a ruling in a case concerning assets inserted in the order of succession. In the ruling in favour of the taxpayer (or rather the taxpayer’s estate), the Supreme Court ruled that ownership interests in two real estate companies that were included in a succession order should not be included in the calculation of the separate estate after the first beneficiary and thus be valued.
The order of succession is a way for a testator to determine by will the order in which the free inheritance is to be distributed among the heirs and their subsequent heirs. The testator can thus ensure, for example, that the inheritance goes first to his child and, on the death of the child, to the testator’s grandchildren. The will will therefore have an effect for several generations. The effect is that the assets that are put in the order of succession do not have to be included in the estate inventory.
In a recent Supreme Court ruling, A had transferred ownership interests in two property companies to B by means of gift deeds as part of a generational succession. The ownership shares were completely separate property for B. According to the deeds of gift, B could not testate the property and the deeds of gift contained provisions on the order of succession. The shares, but not the income from them, were then to pass on B’s death to her life heirs.
B subsequently died, and her spouse took over the property to be divided into undivided estates with their joint heirs, and her separate estate was handed over for private probate.
The High Court upheld the probate court’s decision that B’s ownership interests in the two property companies were to be included in the estate inventory of B’s separate estate and, as a result, valued for the purpose of levying estate duty.
The Supreme Court, on the other hand, found that the provisions of the gift deeds on the order of succession meant that B’s disposal of the ownership shares within the framework of the articles of association of the property companies ceased upon her death and that her life heirs simultaneously acquired ownership of the ownership shares. Therefore, B’s shares in the two property companies were not inherited according to the general rules of the Inheritance Act.
The Supreme Court referred to the fact that, according to the Estate Duty Act, certain assets are not included in the estate for the purpose of calculating and collecting estate duty. This concerns, among other things, assets included in the succession order. Against this background, the Supreme Court found that B’s ownership interests in the property companies did not constitute assets in her separate estate under the Estate Administration Act and therefore should not be valued.
The Supreme Court further stated that the tax liability in cases such as the above arose upon succession and that there was an obligation to submit a notification of the succession. Finally, the Supreme Court concluded that it had not been decided whether B’s heirs should pay estate duty or gift tax on the property. It can thus be deduced that B’s heirs had to pay tax on the succession of the ownership shares.
There are very few decisions and judgements on succession and this decision has contributed to some clarification of the applicable law.
The result of the ruling is in accordance with the testator’s wishes when the order of succession was established.
However, the result could have been different if the order of succession had not been introduced in a deed of gift with precise rules on how the heirs should be able to dispose of the inheritance. The idea of the order of succession would thus disappear if the first heir had the right to dispose freely of the assets and spend all the funds.
The precise drafting of deeds of gift and wills is an essential element of a succession if the testator’s wishes are to be realised.
Bachmann/Partners Law Firm advises on generational succession and provides solutions where succession is part of the generational succession.
For further information, please contact Christian Bachmann on tel. +45 30 30 45 21 / chb@bachmann-partners.dk, Ann Rask Vang on tel. +45 20 94 78 21 / ava@bachmann-partners.dk or Peter Hansen on tel. +45 40 32 35 35 35 / pha@bachmann-partners.dk.